What is a caveat loan? A plain explanation, and the registered alternative

A caveat loan is a short-term business loan secured not by a registered mortgage but by a caveat lodged on the title of the borrower's property. It is one of the most searched terms in Australian private lending and one of the least understood. We do not arrange caveat-only loans. We do get asked about them every week, usually by a borrower who has been offered one, so this is a plain explanation of what a caveat is, what a caveat loan does and does not give the lender, why it is fast, why it costs what it costs, and what the registered alternative looks like.

What a caveat is

Under the Torrens title system every state uses, a caveat is a notice lodged with the land registry by someone claiming an interest in the land. It does not create the interest; it warns the world that the caveator claims one, and it prevents dealings with the title that would be inconsistent with that claim being registered without the caveator being notified. A caveat is quick to lodge — often same day, without the registered owner's involvement — and it can be challenged and removed through the registry or the courts.

How a caveat loan is structured

The borrower signs a loan agreement that grants the lender an equitable interest in the property (typically an equitable charge or an agreement to mortgage). The lender lodges a caveat to protect that interest. No mortgage is registered, so no consent is needed from the bank that holds the first mortgage, no priority deed is negotiated and the lender's solicitors do far less work. That is where the speed comes from.

What the lender does and does not get

• —Gets: notice of any dealing with the title, and leverage — the property cannot be sold or refinanced cleanly until the caveat is withdrawn, which in practice means the loan is repaid.
• —Does not get: a registered interest, a power of sale under the mortgage, or any say in what the first mortgagee does. If the bank enforces, the caveat lender is an unsecured creditor for anything the sale does not cover after the bank is paid.
• —Risks: the caveat can be lapsed or removed if the underlying interest is challenged; the first mortgagee may treat the caveat as a breach of its own mortgage terms; and because enforcement is weaker, the lender prices the loan for it.

Why caveat loans cost more

Weaker security means higher risk means higher pricing, and the short terms — often one to six months — concentrate fees into a small window. Caveat lenders also tend to lend at lower loan-to-value ratios for the same reason. A caveat loan can still be rational for a very short, very certain need where speed is everything and the amount is modest. It is rarely the right structure for a six-figure facility that will run for a year.

The registered alternative

A registered second mortgage gives the lender a real interest on title ranking behind the bank, with the bank's written consent and usually a deed of priority. It takes longer — consent is the rate-limiting step, which we run in parallel with credit — but the loan is properly documented, the lender's position is secured, and pricing reflects that. Where the bank will not consent, a replacement first mortgage removes the need. Our article on first-mortgagee consent explains the process, and our comparison of the two structures goes through when each makes sense.

Refinancing out of a caveat loan

If you already have a caveat loan and it is maturing, or its pricing is unsustainable, it can be refinanced into a registered second or first mortgage. The incoming lender will want the caveat lender's payout figure, a current valuation and the first mortgagee's consent if a second is proposed. See refinancing an expiring private loan.

Questions borrowers ask

• —Is a caveat loan a mortgage? No. It is a loan secured by an equitable interest protected by a caveat. A mortgage is a registered interest on the title.
• —Does my bank find out? The bank will see the caveat on its next title search and may regard it as a breach of the mortgage terms. Some borrowers are surprised by that letter.
• —Can an individual get a caveat loan? Lenders offer them to individuals, but a loan to a natural person for personal purposes is consumer credit regardless of how it is secured. We only arrange business-purpose loans to entities, and only as registered mortgages.